What is Sequence of Returns Risk? Sequence of Returns Risk is the danger that poor market returns in the early years of retirement will permanently impair your portfolio, even if the long-term average return is fine, because withdrawals combined with losses lock in damage that later gains cannot undo. It is the single biggest threat to early retirees.
Worked example: two retirees each start with $1M and withdraw $40,000/year. Retiree A sees -20%, -10%, +5%, then +7% annually thereafter. Retiree B sees the same returns in reverse order. Both experience the identical average return. Retiree A’s portfolio is drained to ~$595,000 after 10 years; Retiree B’s is at ~$1,260,000. Same math, different order, life-changing different outcomes.
Mitigations: hold 2–3 years of expenses in cash or short bonds (a “bond tent”), use variable withdrawal rules (cut 10% spending after a bad year), delay discretionary spending until markets recover, or build part-time income bridges. Early retirees face 40–60 year horizons and should plan defensively. The 4% rule implicitly embeds sequence risk, which is why conservative FIRE planners prefer 3.25–3.5%.